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Downing launches new actively managed liquid alternatives fund aiming to deliver 7% to 10%+ per annum and positive returns in most markets. The new MGTS Downing Active Defined Return Assets Fund (‘Active Defined Returns’, the ‘Fund’), is the first fund from its new Liquid Alternatives team.
The Fund is aimed at institutional investors, Discretionary Fund Managers, IFAs and advised sophisticated individual investors, and will primarily consist of UK Government bonds and large-cap equity index options, which provide significant scalability and strong liquidity. It aims to deliver 7% to 10%+ per annum and positive returns in all markets except for a sustained equity market fall (generally more than 35%), over a period of at least six years.
The Fund is the first to be launched by the new Liquid Alternatives Team established by Downing. Collectively, the team has over 125 years of experience and sector knowledge, and includes Tony Stenning, who held senior roles at BlackRock and most recently was CEO of Atlantic House Group; Russell Catley, founder and also a former CEO of Atlantic House Group; Huw Price, a former Executive Director at Santander Asset Management, and Paul Adams, former Head of Cash Equities and Derivatives Sales, Royal Bank of Canada.
The Fund offers investors a compelling building block for multi-asset portfolios, aiming to add consistent and predictable returns, typically secured with a portfolio of UK Government bonds. The unique proposition includes a hybrid approach of using systematic derivative strategies and active management, combining liquid investments with predictable returns, and an equity like risk profile.
Investment strategy: Maximising the probability of delivering predictable defined returns across the economic cycle.
Systematic Liquid Derivatives: Systematic, derivative strategies optimise the equity risk-return profile. The Fund uses rules-based derivative strategies linked to the most liquid, large-cap global equity indices (i.e. FTSE100, S&P500) with the aim of harvesting well-proven consistent returns across a wide corridor of market conditions.
Strong security: The Fund will hold a high-quality portfolio of assets as secure collateral – typically UK Government bonds.
Active benefits: At times, rules-based, passive derivative strategies can underperform when markets move strongly – this is when specialist active management can add incremental gains by monitoring and monetising positions and applying active risk management.
Key benefits
Increased consistency and predictability of returns: Positive returns in all markets except for a sustained equity market fall of more than 35% over at least six years.
Diversification of risk: The Fund’s risk components are diversified across large, liquid equity indices, observation levels and counterparties. Secured with high-quality assets – typically UK Government bonds.
Active management: Our experienced team will actively manage the Fund and its investments to optimise risk and reward for investors.
Russell Catley, Head of Retail, Liquid Alternatives at Downing, said: “Put simply, we focus your investment risk on the probability of receiving the returns you need, not those you don’t. We target the highest probability of delivering 7% to 10%+ per annum with active management adding material incremental gains. We believe that we are building the next evolution of the proven success of Defined Returns funds
The Downing team isseeing strong demand from clients looking for alternatives to large-cap equity funds which are becoming concentrated in technology stocks, or alternatives to UK equity income funds and illiquid alternatives.”
Tony Stenning, Head of Liquid Alternatives at Downing, said: “The launch of our Active Defined Return Assets Fund is a significant milestone in the ambitious build-out of our new Liquid Alternatives strategies. It is a solution-focused fund that should deliver stable high single or low double-digit returns across a wide spectrum of equity market conditions, except for a persistent multi-year bear market. The Fund is designed to enhance balanced portfolios by providing consistent, predictable returns and is suitable for accumulation or drawdown.
“We aim to deliver a unique combination of proven systematic derivative strategies and specialist active management, and we are doing so at a very compelling fee level, below our closest competitors and in line with active ETFs.”
How the Fund is expected to perform in different markets
In bullish markets: UK Government bonds secure the capital, and the equity index options deliver a predictable 7-10%+ return per annum – giving up some less likely upside.
In neutral markets and normal market corrections: UK Government bonds secure the capital, and the index options deliver a predictable 7-10%+ return per annum.
In a sustained sell-off: if markets fall more than the cover to capital loss and do not recover for six years. Then capital is eroded 1:1 in line with the worst performing index.
The average Cover to Capital Loss is targeted at 35%: the average cover to capital loss represents the average level the Global indices within the Fund could fall before capital is at risk.
Fund key risks
Performance: Capital is at risk. Investors may not get back the full amount invested.
Liquidity: Access to capital is always subject to liquidity.
Counterparty risk: Other parties could default on the contractual obligations.
Fund Structure
UK regulated OEIC fund structure, fully UCITS compliant
Daily dealing, at published NAV
Minimum investment: £100,000
SRRI: 6 out of 7
Depositary: Bank of New York
Authorised corporate Director (‘ACD’): Margetts Fund Management Ltd.
I share-class: SEDOL: BM8J604 / ISIN: GB00BM8J6044
F share-class: SEDOL: BM8J615 / ISIN: GB00BM8J6150
Risk warning: Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice. Please refer to the latest full Prospectus and KIID before investing; your attention is drawn to the risk, fees and taxation factors contained therein. Please note that past performance is not a reliable indicator of future results. Capital is at risk. Investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Investments in this fund should be held for the long term.
Important notice: This document is intended for professional investors and has been approved as a financial promotion in line with Section 21 of the FSMA by Downing LLP (“Downing”). This document is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. Downing does not offer investment or tax advice or make recommendations regarding investments. Downing is a trading name of Downing LLP. Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England and Wales (No. OC341575). Registered Office: 10 Lower Thames Street, London EC3R 6AF.
"We are teetering on a planetary tight rope” - Antonio Guterres, UN Secretary General, October 2024
The UN Emissions Gap report published last week came with a pretty stark warning. If the world only implements its current climate policies then the planet's temperature could rise by up 3.1C. However, if countries follow through on their promises to cut their carbon emissions to net zero then the temperature rise could still be limited to 1.9C.
On the morning of 6 November, the world will find out who will be the next leader of the United States. If current betting markets are right, then it looks like Donald Trump will become the 47th President of the United States.
Polymarkets, 25 October 2024
Why does this matter? Trump is a well-known sceptic of climate change, mostly notably pulling the US out of the Paris Climate Agreement during his first term in office and calling the Green New Deal the “Green New Scam.” And he recently said that he wants to dismantle the Inflation Reduction Act (IRA) which President Biden put in place to help provide funding for clean energy technologies, instead redirecting any unspent funds to other priorities.
Financial markets love two things: certainty and simple narratives. Whilst the outcome of the election is still far from certain, the narrative around the candidates is clear. Harris is good / Trump is bad for all things renewables. Already the prices of clean energy shares around the world have plunged as Trump's poll ratings have soared.
Source: Bloomberg as at 24 October 2024. Past performance is not a reliable indicator of future returns.
For sure, Donald Trump would love to repeal the IRA. It would be a big, bold slap in the face for his arch-rival, Joe Biden. Equally, Kamala Harris is hoping to build on the benefits that the bill has brought.
Political desire meets political reality
However, dig into the detail and the reality is a lot more complicated. Whilst Trump is certainly creating a lot of noise with his bluster about killing off the centrepiece of Biden's climate policy, the fact is that the IRA is bringing much needed investment into the United States. Over $40bn worth of job creating new factories are being built in 2025 alone, many of which rely on the subsidies provided by the bill.
What's more is that much of the funding is going into traditionally Republican states. BloombergNEF (BNEF) estimates that of the $113bn of investments made so far into renewables or electric vehicle value chains, almost 40% have gone to red states, and a further 47% into the electorally critical swing states.
Ironically, part of this is to do with climate. Wind turbines need wide open spaces and lots of breeze, conditions mostly found in the Great Plains states in the heart of Republican America.
Don't forget that Tesla is a big beneficiary of IRA money. Zachary Kirkhorn, Tesla's former CFO, confirmed on his Q2 2023 call with analysts that the company expected to receive between $150m to $250m each quarter in manufacturing incentives. Indeed, around the same time, industry consultants Benchmark Minerals estimated that Tesla and its battery partner Panasonic will receive $41bn in tax credits by 2032. Big numbers, even for a billionaire like Elon Musk.
No wonder a group of 18 Republican Representatives recently sent a letter to House Speaker Mike Johnson warning against moving aggressively to repeal the bill. Trump needs to balance carefully on his own political tightrope.
The long term path is set
In reality, to repeal the Inflation Reduction Act, Republican's would need to control all three arms of government - the White House, Senate and House of Representatives. This is possible but unlikely, at least according to current polls, with the Democrats forecast to regain control of the House whilst the Senate race is too close to call.
Calling the winners and losers from the US election is beyond the abilities of mere European stock pickers such as ourselves. However, the chart below shows what the team at BloombergNEF think.
Our take away is that no matter who wins the race to the White House, the path for renewable investments in the US will likely remain intact. Indeed, BNEF's worst case scenario, an immediate repeal of the tax credits, only leads to a 17% drop in capacity additions in wind, solar, and energy storage in the years up to 2035. To long term investors such as ourselves, it appears that the trajectory for renewable capex is set to remain very strong.
Helping the world decarbonise
Why does this matter to us? If you have followed our recent blogs, you will know that we have around 30% of our European portfolio invested into decarbonisation plays. Holdings such as Cadeler, Siemens Energy and Friedrich Vorwerk have been performing well as renewable spending has driven their order books to all time highs. Within Downing's wider business, our private asset team continues to pour money into renewable assets such as hydro.
Source: Bloomberg as at 25 October 2024. Past performance is not a reliable indicator of future returns.
We still think this is the right place to be invested. At a time when investors are worrying about weakness in the European macro-economic environment, having a substantial part of the portfolio driven by structurally robust drivers such as offshore wind or the need to upgrade electricity networks around the globe to cope with a more decentralised generation landscape is a good thing.
No matter who wins the US election, we remain hopeful that the world will continue to walk the climate tightrope successfully.
Risk warnings: Please note that past performance is not a reliable indicator of future results. Capital is at risk. Investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Investments in our funds should be held for the long-term and are higher risk compared to investments solely in larger, more established companies. Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice.
Important notice: This content is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. Whilst care has been taken in compiling this content, no representation or warranty, express or implied, is made by Downing LLP as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. Downing does not offer investment or tax advice or make recommendations regarding investments. Downing is a trading name of Downing LLP. Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England and Wales (No. OC341575). Registered Office: 10 Lower Thames Street, London EC3R 6EN.
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